Put simply, this due diligence is a comprehensive assessment of the risks and potential liabilities of the selling company. The primary purpose is to provide the acquirer with comprehensive information about all potential risks. In addition, due diligence is intended to verify whether the purchase price agreed upon by the parties is reasonable.
However, it is not uncommon for so-called “deal breakers” to be identified during due diligence—that is, risks that are so serious that they cause the entire acquisition to fall through at this stage. Such risks may include, in particular:
Soil Contamination/Contaminated Sites
Significant risks are associated with soil contamination and contaminated sites. During contract negotiations, company buyers therefore insist that the seller fully indemnify them against such risks. Assuming such an obligation is irresponsible in many situations. It is not uncommon for the buyer to arrange for drilling immediately after the transaction with the aim of securing the “clean site” status for as long as the seller still has assets available.
Unpredictable Product Liability Risks
It is not uncommon for companies to have delivered defective products in the past. Some of the potential product liability risks cannot be quantified. This is particularly true when products have been exported. Liability claims can vary greatly depending on the destination country.
Public-Law Approvals and Permits
For many industries, comprehensive public-law approvals are a crucial factor for success. Occasionally, there are doubts regarding the renewal of certain approvals after existing terms have expired.
Risks Related to Industrial Property Rights
For many companies, intellectual property rights are critical to their success. However, it is not uncommon for intellectual property agreements to expire at short notice without any guaranteed options for renewal. The loss of key licenses and pending patent litigation can also lead to the failure of sales negotiations.
In addition to these glaring issues, there are, of course, a multitude of other reasons not to acquire a company: These include unreliable accounting practices, antitrust issues, and, ultimately, high investment requirements. Insurmountable tax-related difficulties (e.g., litigation with tax authorities) or complicated labor law situations also repeatedly lead to the failure of sale negotiations.
A qualified advisor will review the company for potential “deal breakers” before approaching potential buyers. If the project manager in charge possesses expert knowledge in all areas of business sales, as well as rhetorical and organizational skills, negotiation expertise, and interpersonal sensitivity, the failure of sales negotiations should be preventable. In our 39th fiscal year, our firm closed its 500th business transaction in December 2016. Over the long term, we have successfully completed 82% of all mandates.
